Despite constant news about the weakening of the Dollar against the Euro, the American currency still is strong compared to the currency of many of its trading partners in Latin America and Asia. The Brazilian Real is a case in point.

Although the dollar has fallen about 20% compared to the Real since 2002, this decline was almost entirely due to recovery from a collapse of the Real after the election of Luiz Inacio Lula da Silva, a leftist union leader of the Worker’s Party, as president of this large and important country.

As an self-proclaimed “old friend” of leftist dictators Castro of Cuba and Chaves of Venezuela, the election of President “Lula” sent chills through the international financial markets.

However, when Lula appointed conservative economic ministers and followed recommendations of the International Monetary Fund regarding fiscal and monetary policy, the Brazilian Real recovered steadily over the next two years.

Nevertheless, the Dollar/Real rate was still about 50% higher in February 2005 than in February 2000, suggesting that the U.S. dollar was still a good long-term bet for Brazilian investors.

Two Problems: IMF Policy and Democracy’s Snare

President “Lula” won the approval of the IMF and global financiers by raising taxes to historic levels and by “fighting inflation” with internal interest rates that, in real terms, were among the highest in the world.

Meanwhile, Brazilian industry, the shining legacy of fifteen years of a series of disciplined and enlightened governments that created the “Brazilian Miracle”, now generated handsome trade surpluses and record profits by exporting industrial goods to the rest of the world. On paper, the performance of President “Lula” seemed excellent.

However, there was a darker side to the Lula regime. First, the endemic and vastly inefficient government bureaucracy that had driven inflation of 20-30% throughout the years of the “Brazilian Miracle”, now has enough popular votes to assure itself substantially increased benefits and privileges on a permanent basis in real terms.

(See: [1] Democracy’s Snare).

Under popular democracy, there is virtually no chance of reducing government spending; therefore, tax increases are the only way to balance the budget. Income taxes start on only $4,200 a year. The overall tax burden of 36% of the Gross National Product weighs heavily on the working people that pay for the excesses of the bureaucrats.

Second, tax increases designed to please the IMF and avoid deficit spending, have begun to engender collection techniques that will require citizens to present a tax number in daily transactions, for the purposes of permitting Big Brother oversight through a central computer in order to insure that taxes are collected in full.

Another instance of this leftist government’s willingness to meddle in the private lives of citizens: correspondence containing checks send through the mail or Federal Express, especially overseas, is routinely opened by the authorities.

The other side to Brazilian high taxes is inefficient government services. The lack of effective police protection and domestic security, both in the cities and in the country, is notorious. Kidnappings, hired killings, gang wars, and death by stray bullets are normal occurrences in the large cities.

The slums of Rio de Janeiro have metastasized and now surround and intimidate the increasingly rare “nice neighborhoods” and are virtual nations unto themselves, run by narco-lords where crime flourishes and the police fear to tread. Graffiti cover churches, museums, public buildings, apartment houses, and public statues.

In major cities, like Rio de Janeiro, service in public hospitals is precarious. Public schooling is inadequate with about 15% of the population over fifteen years of age still illiterate.

In certain regions, such as Northeastern Brazil, illiteracy runs as high as 29%. Only 3% of the population has access to the Internet. Although basic services to the population languish, the bureaucrats in Brasilia live high off public funds collected from taxpayers.

How Democracy Stifles Development

The major problem that Brazil must overcome to become a developed nation is to find a way to implement an effective program that will improve the level of public education. Such a program would require twenty years of sustained effort under consistently good government.

The life-cycle of a democratic government in the current Brazilian system is only five years, making a long-term program to improve education difficult to maintain. Popular democracy and millions of illiterate voters elect uneducated leaders (like President “Lula” and the new head of the Brazilian Congress, Severino Cavalcanti).

These leaders push populists programs that pander to the un-educated (such as President Lula’s decision to not require English language proficiency for candidates in Brazil’s Ministry of Foreign Affairs).

A surprisingly large percentage of the Brazilian population believes that Fidel Castro is a great leader, that George Bush is evil, and that socialist and communist propaganda can be taken at face value.

Brazil would probably never have become an industrial country if it were not for fifteen years of dedicated government under the discipline of anti-communist military leaders in the 1960s and 1970s, with rationing of capital and central planning for industrialization.

Unfortunately, unlike South Korea and Singapore, the development programs of the Brazilian leaders did not include education. Towards the end of the military regime, leaders responsible for the “Brazilian Miracle”, like Mario Henrique Simonsen, recognized this error, but it was too late.

Without disciplined financial controls, the country descended into the chaos of populist democracy and the “lost decade” of the 1980s.

The lessons of the “Brazilian Miracle” have now been forgotten, history has been rewritten, and half of the Brazilian population is too young to even imagine what it was like to live in their own country when the crime rate was low and when Brazilians were so patriotic as not even to consider the need to immigrate to find better opportunities overseas, as they do today.
The massive emigration of Brazilians since the end of the military years (estimated at between one and two million people) is the most persuasive argument that a popular democracy is not necessarily the best government for a developing country.

It is not that Brazilians are unaware of the need to improve education. A February 2005 issue of the magazine Veja has as its cover story, “What Korea has done, Brazil can also do”, referring to the remarkable success of South Korea in the field of education, compared to Brazil’s dismal record.

Another recent issue of the same magazine had the lead article, “Has the Worker’s Party Left Brazil More Stupid?”, criticizing President Lula’s decision to remove English as a qualification for candidates in Brazil’s Ministry of Foreign Affairs.

The educational revolution that pushed South Korea into the ranks of developed countries during the 1960s and 1970s, like the “Brazilian Miracle”, was the product of anti-communist, military, autocratic government. Major General Park Chung Hee, as President of Korea, directed the long-term efforts needed to transform Korea from poverty into a developed country within a generation.

A similar developmental “miracle” was seen in Singapore under the autocratic reign of Lee Kuan Yew, who also pushed both education for the people and industrialization.

However, in Brazil, the need for a strong, high-minded central government capable of imagining, financing, promoting, and implementing a consistent educational program over a generation seems well beyond what is possible under a series of short-term, populist-leftist democratic regimes, each of which is only capable of electing corrupt politicians, eager to fill their pockets as fast as possible during their uncertain terms in office.

Shades of Indonesia - 1995

In recent months, articles in Brazilian newspapers have begun to note that Brazilian businesses may obtain financing more cheaply overseas than in the local market.

This eerily resembles the climate in Indonesia in 1995, three years before that country fell off the economic cliff.

The so-called “cheap” financing from abroad requires payment in some hard currency that is not the currency of Brazil. The failure to consider the cost of exchange risk was the same faulty logic that led Indonesian businesses to disaster in 1997.

Another similarity with Indonesia in 1995 is the probable end to the current government in two or three years. Soeharto had old age going against him, while President Lula has a limitation of his term in office and the need to be reelected.

Because of high taxes and business friendly policies that please the IMF, Lula is rapidly loosing support from his own labor party.

In February 2005, President Lula was booed and hissed by socialists and leftists at the World Social Forum in Porto Alegre. His party suffered over 100 defections and he failed, for the first time in history, to put his own man in charge of the Legislative branch.

No matter how one might judge Lula’s presidency, his reelection and therefore the continuity of current economic policy is certainly a matter of speculation.

With high taxes, high internal rates of interest, and uncertainty as to continuity of government economic policy, plus skepticism as to Brazil’s ability to turn the “education key” that is essential to becoming a developed nation, it is not surprising that Brazilian industrialists continue to be willing to accumulate dollars overseas.

Currency preference is a matter of relative values and involves much more than comparative interest rates.